Is military retirement taxed in Alabama?

How it works in Alabama

There is no subtraction line to hunt for, because Alabama never lets military retired pay onto the return. Pensions are reported on Schedule RS, and the 2025 Form 40 booklet lists the retirement systems whose payments "are not taxable and should not be reported." Military Retirement Pay is on that list, next to the Civil Service Retirement System and Social Security. If tax software copied your DFAS 1099-R into Schedule RS, Part II as taxable retirement, take it out.

Check your 1099-R for Alabama withholding. If any was taken from the retired pay, list that 1099-R in Schedule RS, Part I, titled "Retirement Distribution(s) Exempt from Alabama Income," with the reason it is exempt in column I. The Alabama tax withheld from those exempt distributions is totaled there and carried to Part 5, and the form warns that Schedule RS must be completed fully to receive proper credit for Alabama income tax withheld.

Other retirement money follows different rules. IRA and 401(k) distributions are reported on Schedule RS, and from age 65 each taxpayer can exclude up to $6,000 of retirement income taxable to Alabama on line 10 of Part II or Part III. A second-career civilian pension may be exempt too: the booklet lists payments from a defined benefit retirement plan under IRC 414(j) and tells you to ask the plan administrator whether yours qualifies.

On an assumed $36,000 pension, Alabama's 5% top rate would take about $1,800 a year if the pay were taxable. The exemption is not only from state tax: § 40-18-20(a) makes the pay exempt from "any state, county or municipal income tax or like tax by whatever name called."

If an earlier Alabama return did tax the retired pay, file a complete Form 40 with the Amended Return box checked; the booklet says it is processed after the original. Under § 40-2A-7, the refund window is the later of three years from the date the return was filed or two years from payment, so a 2023 return filed in April 2024 can still be corrected until April 2027.

What trips Alabama retirees up

• The retirement year is a split year. Alabama taxes a resident's active-duty pay on the same Form 40 that leaves retired pay out, so your final months on active duty stay taxable unless they fall under the combat zone, deployment or allowance exclusions in the booklet.
• The Department's web page "Income Exempt from Alabama Income Taxation" lists military retirement pay without citing a statute (read October 9, 2026). The authority is § 40-18-20 on the Legislature's site, which says that from January 1, 1989, "and for all successive tax years," all retirement payments it covers are exempt.
• The $6,000 age 65 exclusion on Schedule RS applies only to retirement income that is taxable to Alabama. Your exempt military check uses none of it, which leaves the full $6,000 for IRA or 401(k) withdrawals once you turn 65.
• Residency follows the service member's home of record. The booklet says personnel who were Alabama residents when they entered service remain residents until proof of a change of home of record is made, so an Alabama domiciliary keeps filing Form 40 for active-duty pay while stationed elsewhere.